Bailey McCann, Opalesque New York: A new survey of fund managers done by Bank of America Merrill Lynch shows that investors are becoming cautiously bullish on the global economy and as such are taking a renewed interest in equities. The new year sees asset allocators assigning more funds to equities than at any time since February 2011, while their confidence in the world’s economic outlook has reached its most positive level since April 2010.

According to the survey, investors’ appetite for risk in their portfolios is now at its highest in nine years, while an increasing number judge equities as undervalued – particularly in Europe. Investors have also reduced cash holdings to 3.8% from 4.2% in December. Investors are also starting to become less concerned about the US fiscal crisis even as Congress still refuses to act. Participants’ perception of the U.S. fiscal crisis as the biggest "tail risk" for asset markets has calmed (down nearly 20 percentage points in two months), though it remains their largest concern.

Almost 60% of participants expect that the global economy will strengthen compared to 40% at the end of 2012. This marks the panel’s most positive outlook since April 2010. An increasing proportion of respondents expect inflation to pick up as well.

The risk-on rally is likely to continue as half of participants expect that bonds will be sold in favor of higher beta equities. Worries over Europe are starting to decline as well, with concern over Italy......................